Inventory accounting a comprehensive guide phần 2 pps

ders into a master order and pick just once in larger quantities for this master order, thereby reducing pick time. Although this approach to picking is excellent, it is expensive. Besides the cost of indicator panels for each rack location, one must also invest in the integration of all related software into the existing warehouse management system. Given the cost of this approach, it is most common to see it being used only for the highest- volume SKUs. As prices fall, we may see a larger proportion of inventory being picked using this system. Another issue is changes in picker training and related procedures to mesh with the new system, which one should consider well in ad- vance of system implementation. Any new training and procedures should be tested with a small group of pickers before rolling them out to the full picking staff. 1-8 Backflushing The preceding discussions have all focused on the uses of technology to make data collection easier. What about using a different production tracking system to elim- inate the need for data collection? In this section, we discuss how backflushing works and how it can be used to reduce the volume of data collection. A traditional inventory tracking system traces inventory as it moves from the warehouse, through the production process, and to the shipping dock. This approach requires one to record a transaction for every physical inventory movement. Each time this occurs, another computer entry is needed to tell the production control staff where the inventory is now located, as well as to inform the accounting staff of what new manufacturing charges can be added to products as they are converted into fin- ished goods form. This is clearly a labor-intensive approach that is also highly prone to data entry error. A different approach is used by the backflushing system. With this method, no transaction entry is made until a product has been completed—there is no entry to show that anything has left the warehouse or traveled through the various stages of production. Instead, the computer system takes the final production figure en- tered, breaks it down into its constituent parts, and removes these items from the warehouse records. This procedure can save a significant amount of data entry time, but it is useful only in certain situations. First, it should be used only when the production staff is fully capable of achieving accurate final production counts, because miscounts result in incorrect changes to warehouse records. This is a particular problem for companies with high levels of production employee turnover or low educational levels, because such conditions result in poor levels of employee knowledge of pro- cedures, which in turn leads to inaccurate data entry. Second, there must be accu- rate systems in place to trace any fallout from the production process, such as for scrap or rework. These items are not eliminated from the inventory database through the standard backflushing system, and so must be accounted for separately. If this is not done, the reported inventory levels will be too high. Finally, the production Inventory Data Collection / 13 c01_4353.qxd 11/29/04 9:19 AM Page 13 process must be a short one, preferably completing products in a single day. If not, backflushing of components from stock may not occur for some time, which ren- ders the inventory database inaccurate. It may state that inventory is on hand that is actually currently in production. This factor is also important from an inventory valuation perspective, because a rapid production process allows a company to flush out its production lines at the end of a reporting period so there is no work- in-process to be valued by the accounting staff. If these factors have not been con- sidered by the management team, it is probable that a backflushing system will lead to incorrect data in a company’s materials management database, despite the greatly reduced level of data entry it requires. Consequently, the backflushing option should be used with care. 1-9 Summary of Data Collection Techniques Many data collection methods have been described in this section. Of the items pre- sented, bar coding (preferably using wireless technology) is the most broadly ap- plicable. Although it may be heavily supplemented by and even partially supplanted by radio-frequency identification, this transformation will not occur until the RFID technology becomes less expensive and more reliable. In the meantime, bar coding is the most reliable and error-free approach to inventory data collection. Electronic data interchange is used for the exchange of information between trad- ing partners, and so tends to be an add-on application to a corporate data collection system. Likewise, document imaging is a useful additional application that provides extra information about documents whose text cannot otherwise be incorporated into an inventory database. Nonetheless, it is a peripheral application whose importance is strictly secondary to the recording of basic inventory transactions. Both voice picking and pick-to-light are excellent data collection techniques, but they are expensive and only apply to a small (although important) subset of all inventory transactions. Finally, the use of backflushing can result in a massive reduction in the volume of inventory transactions but can also lead to a considerable reduction in inventory accuracy unless properly installed. Thus, the best approach to inventory data collection is to first install bar cod- ing to improve overall inventory transactional accuracy. Then, if it is necessary to conduct extensive communications with business partners, bolt on an EDI appli- cation. Otherwise, consider the use of pick-to-light or voice picking if there are many picking transactions. At this point, nearly all inventory transactions will con- tain some degree of automation, and inventory record accuracy should be relatively high. This is a good time to consider the pros and cons of implementing backflush- ing, but with the knowledge that it may not be applicable to a company’s specific circumstances. The last step is to review the need for a document imaging system in order to layer more information onto the inventory database. 14 / Inventory Accounting c01_4353.qxd 11/29/04 9:19 AM Page 14 15 2 Inventory and Manufacturing Systems 1 2-1 Introduction In the preceding chapter, we discussed a variety of methods for collecting data about inventory. The next question one might ask is: What information do I need to col- lect, and how might this vary depending on the manufacturing system in use? This chapter covers the flow of information through a bare-bones manufacturing system using minimal transactions, one organized under a manufacturing resources plan- ning (MRP II) system, as well as one under a just-in-time system. The differences in transactions required for the various systems, as you will see, are significant. 2-2 The Simplified Manufacturing System An entrepreneur decides to manufacture a new product and does so out of his garage until expanded sales allow him to move into a small production facility and hire a few staff to assist in the process. In this home-grown environment, the first required inventory transaction occurs when the fledgling company receives billings from its suppliers subsequent to having ordered supplies, requiring it to record a liability to the supplier and an offsetting inventory asset for whatever was bought. When the company eventually sells products, it must record another transaction to relieve the inventory account for the amount sold, with an offsetting increase in a cost of goods sold account. The basic transactions are noted in Exhibit 2-1 at the points in the cost of goods sold cycle where they occur. Although this approach is admirable for its spare style, it is severely lacking from both a control and costing standpoint. First, the entrepreneur has no idea if there is any scrap in the manufacturing process, because the system does not relieve 1 The MRP II and JIT system descriptions in this chapter were adapted with permission from Chapters 26 and 27 of Bragg, Cost Accounting: A Comprehensive Guide, John Wiley & Sons, 2001. c02_4353.qxd 11/29/04 9:20 AM Page 15 Exhibit 2-1 Inventory Transactions in a Simplified Manufacturing System Receiving Putaway Kitting Production Putaway Shipping Deliveries Customers Inventory receipt Journal Entries Physical Count Adjustments Picking for Shipment Quality Assurance Quality Assurance 1 1 2 Db Cr Inventory xx Accounts Payable xx Inventory sale2 Db Cr Cost of goods xx Inventory xx 16 c02_4353.qxd 11/29/04 9:20 AM Page 16 any scrap from the system. Second, the purchasing department staff can order in- ventory whenever they want and in any quantities without anyone knowing if they are doing a good job, because the system has no way of determining how much in- ventory is actually in stock. Third, the inventory accountant cannot assign pro- duction costs to inventory, because there is no device for tracking the status of inventory through production; instead, all production costs must be charged to expense in the current period, even if the company is deliberately building its in- ventory stocks, resulting in probable losses in the current period and disproportion- ately high profits when the inventory is later sold. Consequently, the bare-bones style requires little accounting but has a severe impact on one’s ability to run the business. The problems just noted will have a considerable negative impact on the com- pany as it grows, so the entrepreneur is usually forced to add more inventory trans- actions. These added transactions are noted in Exhibit 2-2. The exhibit shows journal entries being initiated whenever inventory physically moves to a different part of the company, including raw materials inventory (shown as “R/M Inventory” in the related journal entry), work-in-process inventory (shown as “WIP Inventory”), and finished goods inventory (shown as “F/G Inventory). There is also a journal entry to record any quantity adjustments encountered dur- ing a physical count; the related journal entry indicates that either a debit or credit can be used, because adjustment may increase or decrease the on-hand balance. Note that the entrepreneur has just gone from two journal entries to eight, thereby quadrupling the required volume of transactions. At this point, one should seriously consider the use of bar coding data entry methods as described in the preceding chapter, because transaction errors are likely to increase dramatically at this stage. Although the entrepreneur may have a much better handle on the location of and quantity of his inventory with this more advanced system, the state of his product costs has not improved much: He is now recording scrap as soon as it occurs, but he is not adding costs to inventory for direct labor or overhead costs incurred. Fur- thermore, he is not tracking the changing cost of raw materials over time with any sort of cost layering system. Finally, there is no consideration of reducing inven- tory costs for either obsolescence or the lower of cost or market rule. Without these added calculations, the inventory is not in compliance with generally accepted ac- counting principles for inventory costing and would fail an audit. The details of these added transactions are described in detail in Part II (Inventory Transactions) of this book, and they are illustrated here in Exhibit 2-3. This reveals the same in- ventory flow shown in Exhibit 2-2, but now shows only costing entries. The costing entries shown in Exhibit 2-3 are in their most simplified form and do not include cost layering calculations at all, because they are much too complex to list in the simplified journal entry format listed in the exhibit. The intent of Ex- hibits 2-2 and 2-3 is to present the considerable amount of inventory unit tracking and costing entries required for even a relatively elementary materials flow. In the next section, we explore how a more advanced system, called the manufacturing resources planning (MRP II) system works, and how the flow of inventory and re- lated transactions are impacted by it. Inventory and Manufacturing Systems / 17 c02_4353.qxd 11/29/04 9:20 AM Page 17 Exhibit 2-2 Additional Inventory Transactions to Improve Physical Controls Receiving Putaway Kitting Production Putaway Shipping Deliveries Customers Inventory receipt Journal Entries Physical Count Adjustments Picking for Shipment Quality Assurance Quality Assurance 1 1 8 2 3 4 5 6 7 Db Cr R/M Inventory xx Accounts Payable xx Record counting adjustments4 Db Cr R/M Inventory xx xx Counting Adj. xx xx Move to finish goods7 Db Cr F/G Inventory xx QA Review xx Move to QA review 2 Db Cr QA Review xx R/M Inventory xx Move to work-in-progress 5 Db Cr WIP Inventory xx R/M Inventory xx Inventory sale8 Db Cr Cost of Goods xx R/M Inventory xx F/G Inventory xx Move to raw materials inventory3 Db Cr R/M Inventory xx QA Review xx Move to QA review 6 Db Cr QA Review xx WIP Inventory xx 18 c02_4353.qxd 11/29/04 9:20 AM Page 18 19 Exhibit 2-3 Additional Inventory Transactions to Improve Costs Receiving Putaway Kitting Production Putaway Shipping Deliveries Customers Create obsolescence reserve Journal Entries Physical Count Adjustments Picking for Shipment Quality Assurance Quality Assurance 1 1 2 5 3 4 Db Cr Cost of Goods xx Obsolete Reserve xx Assign overhead costs to inventory4 Db Cr Overhead Costs xx WIP Inventory xx F/G Inventory xx Charge inventory to reserve 2 Db Cr Obsolete Reserve xx R/M Inventory xx Lower of cost or market rule 5 Db Cr Loss on Valuation xx R/M Inventory xx F/G Inventory xx Write off scrap/spoilage3 Db Cr Cost of Goods xx WIP Inventory xx c02_4353.qxd 11/29/04 9:20 AM Page 19 2-3 A Description of the MRP II System The MRP II system was a gradual development of computer systems that were de- signed to bring the advantages of computerization to the manual manufacturing sys- tems in existence before the 1960s. It began with the creation of databases that tracked inventory. This information had historically been tracked with manually updated index cards or some similar device and was highly prone to error. By shifting to a computer system, companies could make this information available to the purchasing department, where it could be readily consulted when determining how many additional parts to purchase. In addition, the data could now be easily sorted and sifted to see which items were being used the most (and least), which yielded valuable information about what inventory should be kept in stock and what discarded. The purchasing staff now had better information about the amount of inventory on hand, but they did not know what quantities of materials were going to be used without going through a series of painfully tedious manual calculations. To allevi- ate this problem, the MRP II system progressed another step by incorporating a production schedule and a bill of materials for every item listed on it. This was an immense step forward, because now the computer system could multiply the units listed on the production schedule by the component parts for each item, as listed on the bills of material, and arrive at the quantities that had to be purchased in order to meet production requirements. This total amount of purchases was then netted against the available inventory to see if anything in stock could be used, before placing orders for more materials. The lead times for the purchase of each part was also incorporated into the computer system, so that it could determine for the pur- chasing staff the exact dates on which orders for parts must be placed. This new level of automation was called material requirements planning (MRP), because (as the name implies) it revealed the exact quantities and types of materials needed to run a production operation. However, the computer programmers were not done yet. As the 1960s gave way to the next decade, the MRP system evolved into the manufacturing resources plan- ning (MRP II) system. This newer version contained all of the elements of the old MRP system, while also adding on several new features. One was the use of labor routings, which itemized the exact amounts of labor required to complete a prod- uct, as well as the identities of the machines on which this work must be done. By multiplying labor routings by the production quantities listed on the production schedule, the computer system could now report on the number of laborers required for a production facility for each day of production and even itemize the skill clas- sifications needed. This was of great assistance in planning out headcount re- quirements on the production floor. Of even greater importance was the use of the same information to determine the capacity usage of each machine in the facility. If the MRP II system revealed that the scheduled production would result in a ma- chine overload in any part of the plant, then the production schedulers could reshuf- fle the schedule to shift work to other machines, thereby avoiding bottlenecks that would keep the company from meeting its production targets. The main features of the MRP II system are noted in Exhibit 2-4. 20 / Inventory Accounting c02_4353.qxd 11/29/04 9:20 AM Page 20 This capacity planning feature was of particular concern as the attention of companies shifted from simple material planning to ensuring that customers re- ceived their shipments on the promised dates. By verifying in advance that customer orders would be completed on time, there was no longer any last-minute scrambling to ship out orders for which there was no available machine time. Another benefit Inventory and Manufacturing Systems / 21 Exhibit 2-4 The Flow of Information in an MRP II System Customer Order Inventory Records Internal Production Order Capacity Schedule Mainframe Labor Routing Records System Inputs: Databases: Bill of Material Records Production Schedule Work Orders Picking Tickets Automated Purchase Orders Electronic Data Interchange Transmission to Suppliers Purchasing Schedule c02_4353.qxd 11/29/04 9:20 AM Page 21 was that customers could be told at or near the time of order placement when their orders could be shipped. Also, if problems of any kind arose, the computer system would notify the production planners, who could reschedule customer orders and tell the customers as far in advance as possible of changes in their ship dates. All of these changes led to a major advance in the levels of customer service that companies could offer. Although this is an extremely abbreviated description of MRP II, it touches on the highlights of how the system functions and what kinds of results are obtained by using it. The underlying software is exceedingly complex and requires lengthy hands-on training and course work to fully understand. However, the basic oper- ating principles are the same, no matter what type of software is used, so expert MRP II practitioners do not have great difficulty in learning new MRP II software packages. The MRP II system is essentially an enormous scheduling tool. It was originally designed to bring structure to the chaos of the manufacturing floor, which it certainly has done in many cases. However, the system was designed to track and plan for existing manufacturing practices, rather than attempt to impose a new methodology for production onto a company. As a result, the same old methods of production still underlie the system—only now everyone knows exactly how those inefficient meth- ods work and can plan around them. The MRP II system still allows suppliers to ship in low-quality goods, requires periodic quality inspection points, allows work-in- process to build up, scrap to occur, and machines to have excessively long setup times—all factors that are directly addressed and reduced by the just-in-time (JIT) manufacturing methodology. Consequently, the MRP II system is much more of a tactical weapon for a company than a strategic one: It will not allow an organiza- tion to make great leaps in cost reduction or invested capital, but it can certainly allow it to improve inventory turnover to a significant degree and leads to a much smoother production process. 2-4 The Importance of Databases in an MRP II System The foundation of the MRP II system is the three databases that feed it informa- tion. The most important is the bill of materials database, which consists of a sep- arate record for each product manufactured, with each record itemizing the exact quantities of components, as well as their standard anticipated scrap rates. If there are large subassemblies, then these are usually recorded in a separate record and only referenced in the main record; this practice keeps the bills down to a tolera- bly short length. The bill of materials database is the driving force behind the ma- terial requirements planning portion of the MRP II system, so its accuracy is of the highest importance. An accuracy level of 98% is generally considered to be the bare minimum that will allow the MRP II system to generate accurate information. To attain such a high level, access to the database is closely guarded, and the en- gineering, purchasing, and production staffs are actively encouraged to warn of problems derived from it. Without a sufficient level of accuracy in this database, employees will experience problems with the information produced by the system, 22 / Inventory Accounting c02_4353.qxd 11/29/04 9:20 AM Page 22 [...]... for each item and derive a product cost for anything in the database, which can then be used for a variety of variance and margin analyses Another key database is for labor routings Each record in this database contains a detailed list of the exact times that each labor position needs to complete a product, and usually includes the required machine time, as well Accuracy levels in this database are... person takes each 2 A kanban is described in this text as a card, but it can actually be any form of notification A common alternative is a container of a particular size When an upstream machine receives this container, it means that the machine operator is authorized to fill that container with parts—no more, no less—and then send it back to the downstream machine for immediate use 26 / Inventory Accounting. . .Inventory and Manufacturing Systems / 23 such as incorrect or missing purchasing quantities, that will rapidly lead to production shutdowns that are caused by missing materials The bill of materials database is also an outstanding tool for the inventory accountant, because it contains accurate information about product components With that information in hand, it is usually a simple matter to... an overhead cost pool left over that must be allocated to products However, given the large number of changes implemented as part of the JIT system, inventory accountants may find that there are now better allocation bases available than the traditional direct labor allocation For example, the amount of time that a product spends in each work cell may be a better measure for allocating costs, as may... information in this database is best used in concert with the bill of materials database, because the two include between them all of the direct costs that are applied to a product The final database is for inventory This one records the exact quantity of all items in stock Better inventory databases also keep exact track of the usage patterns of inventory for several years Once again, the accuracy level must... this expense category can be separately tracked by individual cell and charged to products Repairs and maintenance Nearly all of the maintenance that a company incurs is spent on machinery, and they are all grouped into machine cells By having the maintenance staff charge their time and materials to these cells, their costs can be charged straight to products Only maintenance work on the facility will... Some small inaccuracies here will not bring down a production facility, but there will be occasional work stoppages caused by inaccurate labor or capacity calculations that cause bottlenecks to arise The inventory accountant can use the labor information in these records to determine the standard labor cost of each product, which has applications in the reporting of variances and margins The information... but the real culprit is the accuracy of these databases, which are skewing the system’s outputs Consequently, the greatest possible attention must be paid to creating and maintaining an exceptional level of accuracy in these databases 24 / Inventory Accounting Because an MRP or MRP II system is essentially a computerized replication of the traditional manufacturing system, there is no real change in... facility as a whole will still have to be charged to an overhead cost pool for allocation Materials handling Most materials handling costs in a JIT system are eliminated, because machine operators move parts around within their machine cells Only materials handling costs between cells should be charged to an overhead cost pool for allocation Operating supplies Supplies are mostly used within the machine... they can reliably ship high-quality parts, but also to provide them with engineering assistance to bring them to a higher standard of product quality Once suppliers have been certified for their delivery and product quality, a company must install a notification system, which may be as simplistic as a fax machine or as advanced as an electronic data interchange system or linked computer systems, that . for anything in the database, which can then be used for a variety of variance and margin analyses. Another key database is for labor routings. Each record in this database con- tains a detailed. main features of the MRP II system are noted in Exhibit 2- 4. 20 / Inventory Accounting c 02_ 4353.qxd 11 /29 /04 9 :20 AM Page 20 This capacity planning feature was of particular concern as the attention. greatest possible attention must be paid to creating and maintaining an exceptional level of accuracy in these databases. Inventory and Manufacturing Systems / 23 c 02_ 4353.qxd 11 /29 /04 9 :20 AM